Block Gives Up on China Shorts, Says State Protects Fraud

Carson Block, founder of Muddy Waters LLC, has most recently targeted Singapore-listed Olam International Ltd., saying in a report published today that the commodity trader runs a high risk of failure. Photographer: David Paul Morris/Bloomberg

Nov. 27 (Bloomberg) -- Carson Block, founder of Muddy
Waters LLC, said he’s lost interest in betting against Chinese
stocks and speculates the government is protecting fraudulent
companies.

“China has gotten harder in the sense that the government
has really taken the side of the fraud,” Block said in an
interview on Bloomberg Television’s “Market Makers” program
today. “The government is working with a number of these
companies to try to conceal records that are public. When you
are up against that sort of strength of the ability to revise
history, it becomes difficult. That is one of the reasons we’re
not that interested in China anymore.”

A phone call to the State Administration for Industrial and
Commerce, which compiles corporate records in China, wasn’t
answered after business hours in Beijing. An official at China’s
consulate in New York, who asked not to be identified because
it’s against their policy, said that she’s not in a position to
respond to Block’s comments.

Block, 36, shot to fame by betting on declines in stocks of
Chinese companies listed in North America, including Sino-Forest
Corp. Muddy Waters alleged companies falsified their accounting
and misled investors in a series of research reports. Sino-Forest, based in Hong Kong and Mississauga, Ontario, slumped 74
percent before eventually filing for bankruptcy protection in
March after Block questioned its plantation assets.

Since Sino-Forest, Muddy Waters has focused on New Oriental
Education & Technology Group Inc. and Focus Media Holding Ltd.
Their shares have all rebounded after initial slumps when Block
questioned their accounting. Both companies have denied any
wrongdoing.

Olam Targeted

New Oriental, an education service provider based in
Beijing, has risen 28 percent since July 17, the day before
Block said financial statements from the company’s units were
fraudulent.

Focus Media, the Shanghai-based advertising company that
Block claims overstated its network, has posted a 22 percent
advance in its American depositary receipts this year. Focus
Media has attracted a $3.5 billion buyout offer from a group of
private-equity firms including Carlyle Group LP.

“If there’s something that happens that can fundamentally
alter your prices, you have to be pragmatic,” Block said.

Block has most recently targeted Singapore-listed Olam
International Ltd., saying in a 133-page report published today
that the commodities trader runs a high risk of failure. Olam,
the world’s second-largest rice trader, is the first non-Chinese
company Block has said he is betting against.

Outside Capital

Olam is suing Muddy Waters and Block for defamation as the
stock has slumped more than 10 percent in Singapore since the
short seller’s first allegations against the company on Nov. 19.

Block, a lawyer, said today that he stands by Muddy Waters’
report on Olam and is ready to defend himself in court. Block
also said he has no plan to take outside investors’ money when
asked whether Muddy Waters would start a hedge fund.

“Every now and then we’ve discussed that possibility,” he
said. “I don’t think we can continue communicating with the
market our short ideas the way we do now if we took outside
capital.”

Block’s allegations over the past two years have increased
investor scrutiny of Chinese companies trading on North American
stock exchanges. The Bloomberg Chinese Reverse Mergers Index,
which tracks 81 Chinese companies that gained U.S. listings
after buying firms that already trade, has tumbled 68 percent
since the end of 2009. Companies including China MediaExpress
Holdings Inc., an advertising company, have withdrawn their
listings after Block alleged financial irregularities.

Curbing Access

China began limiting access to corporate filings this year
after short sellers used them to highlight accounting
discrepancies in companies listed abroad.

China Development Bank Corp, the state-owned lender charged
with working to boost the nation’s competitiveness, is providing
more than $1 billion to assist companies, including meat
producer Zhongpin Inc.and Fushi Copperweld Inc., a manufacturer
of steel wire, leave the U.S. stock market.

Since April 2010, 49 companies -- including Focus Media and
7 Days Group Holdings Ltd. -- have announced their intention to
go private and de-list from U.S. markets, according to a report
by Roth Capital Partners issued Nov. 5.